You may have missed the announcement in the Budget that the government has decided to postpone the public sector’s adoption of international financial reporting standards, but it is one that has implications for around 2,000 public sector bodies.

The reasons for the delay are a lack of general IFRS ‘preparedness’ and specific difficulties around PPP/PFI accounting. Several central government departments made it clear that they could not meet the 2008/09 timetable.

The extra year gives public bodies more time to prepare ­ but they can’t now rest on their laurels. The introduction of IFRS will have a significant impact on the financial statements of public sector entities just as it did in the private sector.

IFRS requires thorough examination of an organisation’s business to identify the ‘known unknowns’, such as a financial instrument embedded in a procurement contract, and it is a lengthy and exacting process. Even with the postponement, it is vital to maintain the momentum around IFRS transition ­ a 12 month delay in the go-live date does not mean public bodies can park IFRS until next year.

The private sector experience is that the ‘devil is in the detail’. It is only once IFRS transition is underway and the impact of each standard is fully considered that the scale of the challenge becomes clear.

It is a challenge that includes capturing relevant disclosure data from outside finance, or documenting based on testing, why the numbers in the primary resource account statements have not changed.

Time-consuming task

Even if a public sector body has no change it will take time to go through the requirements of each standard and prove that that is the case. Various sources of information may be required to support such a conclusion. It is easy to underestimate the time it will take to complete such a task.

Considerable progress has already been made by a number of public bodies, often with the support of external advisors. Now all public bodies need to be able to make the transition to IFRS on the same time-line.

The private sector had five years to make the transition, and while nobody missed the deadline this was not always assured.

There are two major differences that highlight the scale of the challenge facing the public sector: IFRS standards were being developed and implemented simultaneously by the private sector; Secondly, the private sector only had to apply IFRS at a group or parent company level.

The Treasury is requiring all public sector organisations, from the smallest agency to the biggest central government departments, to adopt the standards.

Research shows significant changes in the financial outturn for a number of corporate sectors when reporting under IFRS compared to UK GAAP. This is partly due to more assets being recorded on the balance sheet under IFRS and the fair valuing of these assets.

While the public sector has been focused on the fact that most assets in PPP/PFI
transactions are likely to come on balance sheet under IFRS, it is also likely that more leased assets, intangible assets, investment properties and financial instruments will also be recorded on the balance sheet.

Given the public sector’s complex budgetary framework the implications need to be carefully considered. The link between the impact of IFRS accounting changes, the budgetary framework in the public sector, and IFRS’ requirement to capture relevant disclosure from outside finance will mean government finance professionals must get out and about and be more visible across departments.

Hopefully this will be both in relation to collecting retrospective information for accounts, but also in the financial management of future programmes and projects.

Bigger picture

IFRS is one of the areas of focus for Jon Thompson, the newly-appointed head of the government finance profession, as he takes forward the professionalisation agenda.

Much of the debate on implementation in the public sector has been around PPP/PFI, however, the postponement is also in response to the level of IFRS preparedness and there are other assets likely to be brought on balance sheet under IFRS.

The incidental result of delaying implementation is that the government will not need to bring up to, what some commentators say, could be £30bn of underlying assets in PFI/PPP arrangements onto its balance sheet for another year.

Although it was never certain this would become government debt it will at some point have significant implications for the government’s debt position and its ability to comply with its own fiscal rules. The postponement of IFRS implementation in the UK public sector makes sense in the context of the scale of the challenge.

The momentum must be maintained, and the Treasury proposals that public bodies will prepare shadow IFRS accounting and implement the UK GAAP standards relating to financial instruments in 2008/09 are vital.

On the agenda

The government’s motivation for the move to international financial reporting standards was clearly stated when the policy was announced in the 2007 Budget: ‘…The government needs to use high value performance data in combination with appropriate financial data…in order to bring benefits in consistency and comparability between financial reports in the global economy and to follow private sector best practice.’

To put the issue into a wider context, the move to IFRS can be seen as an important part of the government’s finance professionalisation agenda. It is an agenda that includes professionally qualified finance directors sitting on the board of Whitehall departments; faster closing of accounts; enhanced financial management of future programmes and projects.

Reporting under IFRS will require government finance professionals to be familiar with the accounting framework used by the largest corporates.

HM Treasury, in its accounting guidance has over recent years been moving away from reproducing the underlying standards in a public sector context and now most IFRS material directs government finance professionals to the actual standards, with adaptation limited only to where the UK public sector business is genuinely different.

Mark Williams is part of Deloitte’s government accounting advisory team